13. Special Will and Trust Provisions

Several provisions are extremely effective in reducing taxation and administrative expenses. Even though they may not apply today, it would be well to discuss with your attorney the advisability of including them in new or amended documents.

It is generally advisable to direct that any life insurance policy owned by the decedent on the life of another be placed in the Non-Marital Trust in order to avoid the face amount being taxed at the spouse's death. This provision should be accompanied by language directing and authorizing the trustee to continue the contracts and use trust income for premium payment.

The Tax Reform Act of 1981 subjected all retirement plans to similar estate taxation. Generally, proceeds payable in a lump sum are inculpable in the estate. However, if paid in installments or an annuity up to $100,000 of the proceeds are excludable. To prevent taxation in the spouse's estate, you can direct that benefits from retirement plans be
payable to the Non-Marital Trust and authorize the Trustee to elect installments or an annuity.

Trust Agreements normally contain provisions in the Non-Marital Trust for the education and special care of children. However, these funds have already been subject to taxation, and will pass to the beneficiaries without shrinkage at the spouse's death. A clause may be inserted requiring the Trustee to discuss with the spouse the tax savings potential of using funds from the Marital Trust or personal funds. The effect on the spouse's income would be identical but ultimate taxes would be reduced.

A frequently overlooked tax advantage is that the first $1,000 of the interest portion of life insurance payable to a spouse under a settlement option is excludable for income tax purposes. The Trustee's attention
could be assured by a provision specifically authorizing the Trustee to accept life insurance proceeds under a settlement option in the Marital Trust so as to receive the $1,000 interest exclusion, if appropriate in the overall planning.

Tax reference verification 1-800-829-1040

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